Category Archives: Business

WisdomTree Wins ETF of Year at ETF.com Awards As ProShares Walks Away With 4 Statues

It’s award time again.

Much like Spring follows Winter, although reports of more snow this weekend are leading some to question that, the ETF industry starts its period of self-congratulations on the heels of the Oscars, Grammys and Golden Globes.

ETF.com, the self-proclaimed world’s leading authority on exchange-traded funds, started the season off with their second annual awards banquet.

“Our awards try to recognize the products that make a difference to investors,” said Matt Hougan, president of ETF.com. “The ones finding new areas to put money to work.” The awards are determined by a panel of experts chosen by ETF.com.

Held at The Lighthouse restaurant at New York’s Chelsea Piers March 19, ETF.com wins the prize for best party location. With picture windows overlooking the Hudson River, guests of the cocktail hour took in the sunset over New Jersey before the ceremony started.

The WisdomTree Europe Hedged Equity (HEDJ) was the big winner, grabbing the prize for ETF of the Year, while the Market Vectors ChinaAMC China Bond (CBON) won Best New ETF. Not quite sure what the difference is between those two awards, but obviously both funds stand out from the crowd of 117 ETFs issued in 2014.

However, ProShares swept the evening, as the single provider that won the most awards. The twin funds ProShares CDS North American HY Credit (TYTE) and CDS Short North American HY Credit (WYDE) claimed the awards for both Most Innovative New ETF and Best New Fixed-Income ETF.

“We designed these ETFs for investors who want high yield credit exposure that is isolated from interest rate risk,” said Steve Cohen, ProShares managing director.

The fund was also nominated for Best Ticker of the Year with its homophones for “tight” and “wide”. However, the awards announcer had a chuckle by claiming they really were pronounced “tighty whitey”, a reference to his jockey shorts. Best Ticker was awarded to HACK, the PureFunds ISE Cyber Security ETF.

ProShares also won Best New Alternative ETF for the ProShares Morningstar Alternative Solution (ALTS) and Most Innovative ETF Issuer of the Year.

“We are always striving to deliver new and innovative products to allow investors to build better portfolios,” said ProShares Chief Executive Michael Sapir.

Lee Kranefuss, the man who created the iShares brand of ETFs and built them into the largest ETF issuer in the world won the 2014 Lifetime Achievement Award.

In the only speech of the night — thank goodness — Kranefuss said, “ETFs allow people to take control.” He likened ETFs to iTunes, saying “no longer are you limited to what the record company puts out.” He said he’s often been asked if he thought the ETF industry would take off like it has in the 15 years since iShares launched.

“Not really,” said Kranefuss, “we just put out the best products we could put out.”

The other award winners:

Best New U.S. Equity ETF – iShares Core Dividend Growth (DGRO)
Best New International/Global Equity ETF – Deutsche X-trackers Harvest MSCI All China Equity (CN)
Best New Commodity ETF – AdvisorShares Gartman Gold/Euro (GEUR) and AdvisorShares Gartman Gold/Yen (GYEN).
Best New Asset Allocation ETF – Global X /JPMorgan Efficiente (EFFE)
ETF Issuer of the Year – First Trust
New ETF Issuer of the Year – Reality Shares
Index Provider of the Year – MSCI
Index of the Year – Bloomberg Dollar Index
Best Online Broker for ETF-Focused Investors – TD Ameritrade
Best ETF Offering for RIAs – Charles Schwab
Best ETF Issuer Website – BlackRock

Fed Ready? New Sit ETF Hedges Hikes In Interest Rates

Nobody should invest in bond exchange traded funds without understanding that when interest rates increase, the bond’s price declines. With significant improvements in the economy and unemployment rate, the Federal Reserve is expected to raise rates before 2015 ends. This will affect securities across the entire bond market.

So, what is a bond ETF investor to do? A new exchange traded fund from ETF Managers Group seeks to help investors hedge rising interest rates by using a concept called negative duration that actually creates price appreciation when interest rates advance.

Sit Rising Rate ETF (RISE) holds a portfolio of futures and options contracts weighted to achieve a targeted negative 10-year average effective portfolio duration. Because it holds futures, the ETF is structured as a commodity pool.

Sam Masucci, founder and chief executive of ETF Managers Group, said the ETF should be used as a hedge, or insurance, to protect a bond portfolio from interest-rate volatility. “A small allocation of 10% to 20% in RISE can significantly reduce the interest rate risk within a bond portfolio.”

Duration calculates a bond’s sensitivity to interest-rate volatility. It measures how much the price of a bond is expected to fall when interest rates rise 1% — and rise when rates fall 1%. The longer the duration, the greater the interest rate risk. Negative duration determines how much the price will go up when rates rise. RISE tries to get a 10-to-1 ratio. So if rates rise 1%, the price should go up about 10%.

Bryce Doty, the senior fixed-income portfolio manager at Sit Investment Associates, manages the ETF based on the Minneapolis firm’s strategy.

Where RISE Fits In

Doty said an investor with a bond portfolio with an average duration of four years might choose to sell 20% of the portfolio and invest that money in the negative 10-year duration ETF. This cuts the interest rate risk by almost 70%.

The ETF achieves this effect by holding only four positions. Focused on the risk to short-term rates, 85% of the ETF’s portfolio is in short positions tied to 2-year U.S. Treasury and 5-year U.S. Treasury futures contracts. It also buys a put option on the 10-year U.S. Treasury futures contract. This means if rates rise on the 10-year note, the ETF gets price appreciation. But if rates fall, the EFT is only out the price of the put.

Compared with bond index ETFs, which typically charge expense ratios of less than 10 basis points, RISE, which is an active ETF, charges an expense ratio of 50 basis points. With other expenses factored in, the true cost can rise as high at 1.5%, although the fund is targeting a cost around 85 basis points.

“When you rebalance every month and short new Treasury futures to get target duration, you might get a tax hit at the end of the year,” said Thomas Boccellari, an analyst at Morningstar. “The benefit of the active management is, you pay the manager to control the duration for you and to get it right. But you need to understand that you are giving up a lot of yield to get this product and you need to be sure that is what you want to do.”

Two negative duration ETFs tracked by ETF.com are WisdomTree Barclays U.S. Aggregate Bond Negative Duration Fund (AGND) and WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund (HYND) has $32 million in assets, average daily volume of about 11,000 shares, an expense ratio of 0.28% and is up 0.44% year to date. HYND has $6.5 million in assets, average daily volume of about 9,000 shares, a 0.36% expense ratio and is up 2% this year.

Originally published in Investor’s Business Daily.

DoubleLine Joins State Street On Active Bond ETF

ETF giant State Street Global Advisors teamed up with DoubleLine Capital, the firm of famed bond investor Jeffrey Gundlach, to launch SPDR DoubleLine Total Return Tactical ETF (TOTL) last week.

The actively managed ETF is DoubleLine’s first foray into the ETF space.

One of the most respected bond fund managers in the market, Gundlach ran $12 billion TCW Total Return Bond Fund until 2009. At the time, Morningstar said it was in the top 1% of all funds invested in intermediate-term bonds for the five years ended in 2009.

Gundlach left TCW after a management dust-up and formed DoubleLine in 2010. He’s DoubleLine’s CEO and chief investment officer.

“It’s not a clone of any existing strategies,” said Jeffrey Sherman, a DoubleLine portfolio manager, during a webcast this week. Sherman will co-manage the ETF with Gundlach and firm President Philip Barach. “It’s a new product created just for this offering, but it draws upon the views of Jeff Gundlach and the DoubleLine team.”

While not identical to the firm’s flagship DoubleLine Total Return Bond Fund , ETF investors will be getting a deal. The ETF charges an expense ratio of just 0.55%, compared with the fund’s 0.72% fee for retail investors.

By going with a name-brand fund manager, State Street (NYSE:STT) is making a calculated effort to take advantage of the problems at Pimco. It looks like it wants to become the leading bond ETF in the country by taking on $2 billion Pimco Total Return Bond ETF (BOND).

BOND has seen more than $1 billion in outflow since Bill Gross, Pimco’s bond maven, left the firm in September. This caused BOND to fall to second-largest active bond ETF.

TOTL’s investment objective contains elements of both DoubleLine’s total return and core fixed-income strategies. The ETF aims to have a low interest-rate risk profile.

At the same time it expects to maximize returns through active allocation and selection of securities its analysis determines to be mispriced in the market.

DoubleLine Total Return Bond Fund has focused on mortgage-backed securities. But the ETF can hold any bond, including U.S. Treasuries, investment grade corporate credit, high-yield bonds, collateralized loan obligations, asset-based securities, bank loans and sovereign debt from both developed and emerging markets.

The portfolio must contain a minimum of 20% in mortgages, but it isn’t required to hold anything else. While high-yield, emerging market and CLO securities can each only take up as much as 25% of the portfolio, as much as 85% can be held in government bonds.

The duration of a single bond can range from one to eight years and no security can have a bond rating below BBB-.

State Street Getting Active

State Street, which has a reputation for running passively managed funds, has slowly moved into the active ETF arena. The new fund is its third active bond ETF and 10th overall.

While active equity funds have a hard time beating their benchmarks, the less transparent bond market creates more opportunities for managers to beat their index.

“Passive does best in U.S. equities, but in investment grade fixed-income 65% of managers outperform their benchmark,” said Dave Mazza, head of research at SPDR ETFs. “A skilled fixed-income portfolio manager can find inefficiencies across the market because it is illiquid and opaque.”

Exec’s Departure Latest In Pimco’s Bad Year

Paul McCulley’s announcement last week that he would be stepping down as chief economist at Pacific Investment Management Co. was just the latest note in the giant bond fund company’s annus horribilis.

Early last year, Chief Executive Mohamed El-Erian, Pimco’s heir apparent, left over disagreements with Bill Gross, Pimco’s founder and portfolio manager of the firm’s flagship Total Return Fund . At the time, Total Return was the largest bond mutual fund in the world and Gross the most famous bond investor on the planet.

Then in September, after the fund shrank by $65 billion over the previous 16 months, Gross also abruptly quit, shocking the mutual fund world and sending Pimco into turmoil. He’s now at Janus.

McCulley, a close friend of Gross, had left Pimco in 2010, but returned in May to help Gross calm investors’ nerves amid the outflow.

“McCulley had been brought in by Gross when things were unraveling in the management ranks,” said Jeff Tjornehoj, head of Lipper Americas Research. “Bringing Paul in was like bringing the band back together. He came back so Bill could show ‘It’s not as bad as the newspapers say.'”

With Gross’s departure, there wasn’t much reason for McCulley to stay, and management made that clear with the recent hiring of Joachim Fels, Morgan Stanley’s chief economist, as the new global economic adviser.

New Pimco Team

In the wake of Gross’s departure, Daniel Ivascyn, who has been at Pimco since 1998 and is head of the mortgage credit portfolio team, was named group chief investment officer. In 2013, Morningstar named him Fixed-Income Fund Manager of the year.

Pimco also named deputy chief investment officers Mark Kiesel, Scott Mather and Mihir Worah as portfolio managers of Total Return Fund.

Kiesel, named Morningstar’s Fixed-Income Fund Manager of 2012, is the global head of corporate bond portfolio management with oversight for the firm’s credit research. Mather was previously head of global portfolio management, and before that led portfolio management in Europe.

Before running the real return and multi-asset portfolio management teams, Worah was a postdoctoral research associate at the University of California, Berkeley, and the Stanford Linear Accelerator Center.

In the four months since Gross left, Pimco said, the fund delivered a net after-fee return of 3.99%, outperforming its benchmark by 1.11 percentage points.

Will Inflow Follow?

“The strong performance of the Total Return Fund since Scott Mather, Mark Kiesel and Mihir Worah took over management of the fund is a reflection of the talent of our seasoned portfolio management team,” said Douglas Hodge, Pimco’s CEO, in a statement January.

Still, it doesn’t look like the new team is instilling much confidence in investors. January was the 21st consecutive month of withdrawals, with net outflow of $12.5 billion, although this was significantly lower than the $32.3 billion pulled out the month after Gross left, according to Morningstar. Over the past 21 months, Total Return Fund lost $159.3 billion in net assets, down 54% from its 2013 peak of $293 billion, according to Morningstar. It is now the world’s second-largest bond fund.

For the full story go to Investor’s Business Daily.

Good Debt, Bad Debt: It’s Mostly Bad For You

After six years, the era of deleveraging household debt is over, according to the Federal Reserve Bank.

Since the fiscal crisis, Americans have reduced their household debt by $1 trillion, from $12.7 trillion in the third quarter of 2008 to $11.7 trillion in the third quarter of 2014.

But in November, the Fed reported that the trend reversed during the third quarter of 2014, when Americans increased their debt by $78 billion, or 0.7%.

While many signs show the economy to be growing, there is enough conflicting evidence to leave Americans uncertain about what 2015 will bring for their financial plans. Given the state of the economy, it’s prudent to reduce borrowing to as close to zero as possible.

When taking on debt, it’s important to remember the basic concept of what it is. It’s borrowing money that you have not yet earned, with the promise to pay it back with interest. The big risk is whether you will be able to pay it back. Should you suffer some kind of financial hardship, such as a layoff or reduction in income, will you still be able to make the debt payments?

“Even if they have a good job, most people have budgets that rely on everything going well,” said Kathryn Moore, certified consumer credit counselor at GreenPath Debt Solutions, a nonprofit consumer credit counseling service based in Farmington Hills, Mich. “But what if something happens that the budget can’t handle? For that reason, pay down the debt to leave yourself flexibility.”

Moore says that even if people don’t lose their jobs or suffer a salary cut, sudden price hikes in necessities such as food, energy, health care or rent may cause them to have trouble paying their bills.

Having too many liabilities, especially credit card debt, can be a symptom of having lost control of the management of one’s household finances.

“When we don’t have control over our money, it causes a lot of stress and anxiety,” said Donna Skeels Cygan, author of “The Joy of Financial Security” and owner of Sage Future Financial, an Albuquerque, N.M., advisory firm. “People need to make a commitment to eliminate credit card debt as quickly as possible.”

Cygan says that people don’t know where to start, so they put their heads in the sand and hope their situation will get better, but it won’t. She recommends that people start by creating a net-worth statement, listing all their assets and liabilities. “Many people have no idea what they have. Looking at the bottom line gets your head out of the sand,” she said.

“There are only two ways to cut the debt,” said Moore. “Either bring in more money with another job, or cut expenses.”

In addition to cutting back on entertainment spending, getting rid of premium cable channels, eating out and going to bars, Moore says that other ways to find money are to stop smoking, refinance a mortgage, lower insurance premiums and cut back on saving for retirement until the debt is eliminated. Cygan suggests not buying any new clothing for the next three months, not replacing technology gadgets for a whole year, keeping a car for 12 years and taking inexpensive vacations within your state.

And, of course, stop using your credit cards.

“The best way to pay off debt is to roll it into cheaper debt, like home equity,” said Adam Thurgood, a managing director at HighTower, a Chicago wealth management firm with $25 billion in assets under management. “But you need the discipline to pay it off. Still, it’s risky, because it allows you the opportunity to rack up more high-interest credit card debt.”

But he opposes using home equity loans to purchase items with short useful lives.

Not all debt is bad. The experts say debt that helps acquire an asset — especially one with a long life or benefit, such as a mortgage, car loan or student loan for college — is good debt. Still, bad choices can be made with these loans.

Thurgood says that mortgages with variable rates around 1.5% have been perfect for the past five years. But, he adds, this “Goldilocks” period is coming to an end, and it now makes sense to transition to a fixed-rate, 30-year loan, even at a higher rate. That’s because interest on adjustable-rate loans could shoot above current fixed-rate mortgages.

Car loans with low rates can be a good move, but if these loans start charging 6%, Thurgood says, it’s better to borrow the money from your portfolio, pay the car loan off and pay yourself back with interest in monthly installments over a four-year period.

For the full story go to Investor’s Business Daily.

Target-Date Funds Are Cruise Control Of Investing

Target-date, or life cycle, funds are the cruise control of investing. After you choose which fund to invest in, the fund does all the work for you. You don’t have to think about it again until retirement.

Many target-date mutual funds are funds of funds. They hold a selection of equity funds, such as large-cap, small-cap and international funds, and a selection of fixed-income funds of multiple durations and yields.

The appeal of target-date funds is that they take care of all the asset allocation and rebalancing for you. It’s a balancing act of managing market risk, inflation risk and longevity risk.

Typically, an investor picks a target date around the time he plans to retire. When the investor is young, the fund focuses on growth and mostly holds stock funds. But as the investor gets closer to retirement, the fund’s asset allocation becomes more conservative and focuses on fixed income. The changing asset allocation is called the glide path.

Target-date funds hit the public consciousness after the Pension Protection Act of 2006. The legislation allowed 401(k) plan sponsors to make life cycle funds the default investments for participants who didn’t choose their own funds. The logic was that since investors were now in charge of their own retirement funds, sitting in cash wasn’t going to get them there.

“For the past nine years that we’ve been keeping track, there has been double-digit growth in assets, ever since Pension Protection came out,” said Janet Yang, Morningstar’s target-date fund analyst.
In 2006, of all the 401(k) plans, 57 offered target-date funds. In 2012 the number had jumped to 72, according to the Investment Company Institute.

In 2006, only 19% of 401(k) plan participants held target-date funds. Six years later it was 41%. Also, in 2006 target-date funds made up only 5% of 401(k) assets. By 2012 that had jumped to 15%.
By the end of Q2 2012, target-date mutual funds held $678 billion, said Sarah Holden, the ICI’s senior director of retirement and investor research. The majority of those assets were held in retirement accounts. Defined contribution plans held 68% of the total, and individual retirement accounts 20%. The rest was in the personal accounts of investors looking for the glide path approach.
Vanguard, Fidelity and T. Rowe Price have the largest target-date funds.

Families of target-date funds can have different philosophies, which can lead to wide dispersions in the holdings, returns and fees for funds with the same target year. Recently, fees have become a big issue, and that has helped move plan sponsors toward index-based funds.

“Each client’s needs are going to be different,” said Don Wilson, chief investment officer at BrightWorth, an Atlanta asset manager. “Some target-date funds will be too risky, while others won’t be risky enough.”

Wilson said that if the investor picks his 65th birthday as the target date, he may have 20 years of retirement ahead of him. He may need to have more equities to help his account grow and outpace inflation. The target-date fund may not be taking this into account.

The only ETF provider with target-date portfolios now is Deutsche X-trackers.

For Full story go to Investor’s Business Daily.

Hennessy Funds Outperform With Active Management

More than 70% of actively managed U.S. stock funds lagged their benchmarks over the five years ended June 30, according to the S&P Dow Jones Indices Versus Active (SPIVA) U.S. scorecard.

Hennessy Funds were an exception. Over those five years, nearly 70% of Hennessy’s funds beat their benchmark on an annualized basis.

The SPIVA U.S. scorecard measures performance of actively managed funds against their relevant S&P index in the stock market.

“The past five years (through June 30) have been marked by the rare combination of a remarkable rebound in domestic equity markets and a low-volatility equity environment,” Aye Soe, senior director, Index Research & Design, S&P Dow Jones Indices, wrote in the SPIVA report. Soe added, “This combination has proven difficult for domestic equity managers… across all capitalization and style categories.”

Among U.S. equity funds, 60% of large-cap, 58% of midcap and 73% of small-cap managers underperformed their benchmarks, according to SPIVA.

Managers of international equity fared worse. About 70% of global equity funds, 75% of foreign equity funds, 81% of foreign small-cap funds and 65% of emerging market funds lagged their benchmarks.

Yet of Hennessy Advisors’ 16 funds, which run $5.7 billion, six outperformed their indices for the 12 months ended June 30.

On a five-year annualized basis, 11 funds beat their benchmarks net of fees. Six of the 11 turned over their portfolios just once a year.

“It’s not timing the market, it’s your time in the market,” said Neil Hennessy, the firm’s president, chairman and chief investment officer. “We buy the stocks with a highly disciplined formula, and we hold for a year with no emotions. Then we do it again.”

The two best performers are Hennessy Japan Fund and Hennessy Japan Small Cap Fund.

Over the 12 months that ended June 30, the small-cap fund gained 28.68% vs. the Russell/Nomura Small Cap Index’s 17.21%, says Morningstar. Over the past five years, the fund’s annualized return of 15.13% beat the index’s 9.87% .

The Japan Fund’s 17.54% gain over the past year beat the Russell/Nomura Total Market Index’s 10.86% gain. The fund’s 14.40% five-year average annual return topped the index’s 7.48%.

Among U.S. equity funds, Hennessy Cornerstone Mid Cap 30 gained the most over the 12-month period. Its 31.95% outperformed the Russell MidCap Index’s 26.85%. On a five-year annualized basis, the fund returned 22.32%, beating the index’s 22.07%.

Hennessy Cornerstone Large Growth rose 29.35% over the 12 months ended June 30, exceeding the Russell 1000 Index’s 25.35%. Its five-year average annual return of 19.48% beat the index’s 19.25%.
Hennessy’s best funds over the five years held bonds and stocks. Hennessy Total Return Fund, at 75% equity and 25% bonds, beat the 75/25 Blended DJIA/Treasury Index 15.19% vs. 13.41% on an annualized basis.

Hennessy Core Bond’s 5.42% return outpaced the Barclays U.S. Government/Credit Intermediate Index’s 4.09%.

As for volatility, over the past five years each outperformer beat its bogey four years; the Mid Cap 30 outperformed just three years.

For the full story go to Investor’s Business Daily.

Schroders Says Buy European Equities

he European economy will continue to be sluggish in 2015 leading to the potential for political unrest, said the experts at Schroders, the giant British asset manager. However, European equities should do well in spite of this.

Meanwhile, Japan should see benefits from a weaker yen, but this will hurt other Asian economies.

The 200-year old firm, which manages $448 billion in 27 countries, presented its market view to the press last week in London.

Keith Wade, Schroder’s chief economist, said falling commodity prices will drive inflation lower, and the declining euro will stop deflationary pressure in the euro zone.

Wade is bearish on the Chinese economy, but he doesn’t expect a hard landing. Meanwhile, emerging markets continue to struggle because of the Chinese slowdown.

“A lot of headwinds are being lifted in Europe and that should help growth,” said European economist Azad Zangana, pointing to the weaker euro. Still, he remains cautious.

Rory Bateman, head of European and U.K. equities, agreed Europe’s economy will be sluggish, but that equities will do well. A weaker euro should help corporations deliver earnings growth between 3% and 5%. Falling oil prices will also help earnings. Bateman expects European financials to post double-digit earnings growth.

Still, with high unemployment across the continent, there is high potential for political unrest. Zangana doesn’t expect major upheavals, but still enough to worry investors.

Bob Jolly, head of global macro, said the high unemployment is increasing the popularity of extreme political parties, with potential flashpoints in Spain, Ireland, Germany and Greece.

Steven Cordell, who manages European equity funds, blamed the European recession Ukraine and Russia. He expects a slow protracted recovery. The German economy is suffering from sanctions against Russian companies and the downturn in China, two major export partners. Cordell agreed that the European banking system is now healthy. He said banks can access cheap capital at a 0.05% marginal lending rate from the European Central Bank.

While the credit market reflects the banks’ improved fundamentals, equities don’t. Cordell said 61% of European companies have better dividend yields than bond yields. This tells him the problem is in bond valuations, not equities. He said it’s a good time to buy European stocks because dividends are at their peak yield in excess of bond yields.

Exporting Inflation

As for Asia, emerging markets economist Craig Botham said while Japan’s policy of devaluing the yen makes Japan’s exports cheaper, Japan is exporting inflation to other parts of the region, like South Korea and China. Botham added that Asia is one of the best-placed regions to benefit from a U.S. recovery, when U.S. consumers buy more electronics and consumer durables.

James Gautrey, portfolio manager for global equities, said that by the end of next year the number of people accessing the Internet from mobile devices in India and China will exceed 1 billion. The way to make money is buy telecoms in India and Internet companies in China.

“I think Alibaba is very underrecognized,” said Gautrey. “Its take rate is 2.3% compared with the 12% done by Amazon.”

Originally published in Investor’s Business Daily.

Advisers Must Embrace Tech To Battle Robo Advisers

Technology has disrupted many industries over the past 20 years. It was only a matter of time before it upended the financial advisory business.

In an era where people seemingly spend more time with their friends online than in person, it should come as no surprise that many investors choose to communicate with a computer screen rather than an actual person for financial advice. Human financial advisers have much to fear from these new players, affectionately — or derisively — called robo advisers.

While the old model of the sole practitioner with a book of about 100 clients will probably disappear within 10 years, advisers willing to adapt by embracing new technology and changing their value propositions may be able to flourish.

The key players in the new arena of online investment-management websites include Betterment, Wealthfront and FutureAdvisor. On these sites, people input financial information such as how many assets they have, their goals and their risk tolerance. The computer throws it into an algorithm and puts the money say, into a portfolio of low-risk stock or bond ETFs. The companies are typically more cost-effective than humans, charging between 15 and 35 basis points. They also claim to be more efficient at investment management.

Is Robo Touch Better?

Dan Egan, Betterment’s director of behavioral finance and investing, says that humans have emotional attachments tied up in investments. If you take the human element out and do the job systematically, some tasks — such as rebalancing during a market downturn or correctly timing when to harvest tax losses — become easier.

“We are constantly monitoring the portfolio to improve your returns,” said Egan. “The algorithm is run multiple times during market hours to find the most beneficial time to trade. To achieve the same efficiency, a human being would have to sit there monitoring the accounts 24 hours a day.”

The firm, which began taking clients four years ago, has more than $710 million under management.

“Most advisers are buggy-whip manufacturers in an era of automobiles,” said Ric Edelman, best-selling author, chairman and chief executive officer of Edelman Financial Services. “Advisers who provide only investment services are under significant competition from this new technology. They’re becoming obsolete and are either unaware or in denial.”

The consensus among experts is that advisers need to embrace and stay current with the new technology. Edelman’s firm, which manages $13.5 billion, created its own robo adviser; but he says that to survive, advisers have to provide a broader array of services, such as insurance, estate planning and college planning.

“At a certain level of assets, like a few hundred thousand dollars, you really want to start talking to somebody,” said Doug Wolford, president and chief operating officer of Convergent Wealth Advisors, a Washington, D.C., firm. While he doesn’t consider his company, which manages $8.5 billion and requires clients to have a minimum of $1 million, to be competing against the robo advisers, he says that advisers need to educate themselves about new technology.

Fusing Both Approaches

Bill Harris, chief executive officer of Personal Capital, is finding a way to combine the software aspect of the robo adviser with the personal relationship of a human adviser. Personal Capital offers two services: free software that collects all your financial information and makes it available on phones, tablets and now Google’s (NASDAQ:GOOGL) smartwatch; and human financial advisers for in-depth financial planning.

“Most advisers don’t do planning at all,” said Harris. “They ask five or six questions about risk tolerance, then put you in a prepackaged portfolio. We grab all that data, and then we do high-level financial planning, portfolio maintenance and tax harvesting.”

Harris, former chief executive officer of both Intuit (INTU) and eBay’s (EBAY) PayPal, says that in two years, Personal Capital gained half a million registered users, and the software tracks $1 billion of assets. It has converted enough of the users that it now manages $650 million of client assets.

For the full story go to Investor’s Business Daily.

This is from an Investor’s Business Daily Special Report. For the full report go to Financial Advisers’ Guide — Making Connections.

Biotech ETFs Bounce Back After Three-Month Correction

Biotechnology exchange traded funds surged this week on news that drug giant Merck agreed to buy Idenix Pharmaceuticals for $3.85 billion, leading investors to believe the biotech sector has bottomed out after three months of misery.

On Monday, the big pharma drugmaker offered the tiny biotech $24.50 a share, a 239% premium to its closing price Friday, in order to acquire Idenix’s portfolio of three early-state hepatitis C drugs.

The news sparked a rally in the biotech sector and biotech ETFs. PowerShares Dynamic Biotechnology & Genome Portfolio ETF (PBE) jumped 8.4% Monday, to advance 11% for the week ending June 10. It now has about 9% of its assets in Idenix.

SPDR S&P Biotech ETF (ARCA:XBI), now with 4% in Idenix, leapt 6.8% Monday, for a 14.6% gain over the past five days. Overall, biotech sector ETFs rose an average of 5% over the past week.

Big 2013 Move, Then Pullback

Last year, the biotech sector was one of the best areas of the market, posting a bigger return than the S&P 500. But since February, the sector has undergone a significant retrenchment. First, it started out as a flight from risk in a sector many said was in bubble territory.

The timing was prescient. Over the next three months, a string of biotechs suddenly imploded. In early March, Geron, a biotech with no products, plunged 62% after U.S. regulators halted the trial of its only experimental drug.

In April, Cytokinetics’ shares lost more than 60% after its experimental treatment for Lou Gehrig’s disease failed to work better than a placebo in a clinical trial.

Then the first week of May saw three biotechs all report failures with their leading drug candidates.

“These unexpected blowups and the overall flight from risk hurt the small-cap biotech sector with valuations under $1 billion,” said Ron Garren, an oncologist and editor of BioTechInsight.com, an online biotech stock newsletter in Carmel, Calif.

“They got decimated and some lost more than half their value. Of course, some were overvalued to begin with.”

From late February to May 8, iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), which tracks all the biotechs on the Nasdaq, and PBE each tumbled 18%. XBI sank 29%.

Over the past month, XBI climbed 21% for a year-to-date return of 15%. PBE is up 14% for an 18% gain this year. IBB, the biggest biotech ETF with $5.2 billion in assets, advanced 10% the last 30 days for a 10% return year-to-date.

ProShares Ultra Nasdaq Biotechnology ETF
(NASDAQ:BIB) is a leveraged fund that seeks to post a daily return twice the results of the Nasdaq Biotechnology Index.

It fell 35% during the biotech correction, but gained 21% over the past month. Year to date, BIB is up 16%, but its return over the past 12 months is 82% compared with the 32% return for the average biotech ETF.

Opportunity Seen

“As the yields on dividend stocks begin to dry up, risk stocks look more attractive, and after the biotech beat down, I think these stocks are a great opportunity,” said Garren.

“There has been an incredible amount of work in immunotherapies and cancer. Also, there are big opportunities involved in fatal diseases that need therapies.”